DWINDLING FOREIGN INVESTMENT IN PAKISTAN

SYED FAZL-E-HAIDER
June 30 - July 06, 2008

Despite higher profit ratio in the region, foreign investment has declined due to prevailing political uncertainty during the outgoing fiscal year in Pakistan. As per State Bank statistics, during the first 11 months of the outgoing fiscal year, net inflow of foreign investment has dropped by 37.2 per cent. Total foreign investment stood at $3.944 billion during July-May 2007-08 compared to $6.281 billion in the corresponding period of the last fiscal year. During the period under review, total foreign private investment declined by 30.2 per cent to $3.927 billion compared to $5.628 billion in the same period of last year. The portfolio investment also witnessed a decline of 96.5 per cent to $62.2 million compared to $1.76 billion. Similarly, foreign public portfolio investment declined by 97.4 per cent to $16.8 million compared to $653.4 million in corresponding period of the last fiscal.

The region-wise break-up of investment shows that developed countries' investment in the country declined by 28.7 per cent to $2.68 billion (including FDI $2.437 billion and portfolio investment of $240.2 million). Developing economies investment declined by 38.6 per cent to $930 million (FDI $1.13 billion while $201 million portfolio investment was withdrawn). Among developed countries, Western Europe made a total investment (FDI and portfolio) of $895.5 million and European Union $603.6 million while in the corresponding period of the last fiscal Western Europe invested $2.07 billion and EU $1.98 billion. The investment by IFIs and others was declined by 11.3 per cent to $317.9 million. Caribbean Islands investment witnessed a fall of 96.6 per cent to only $0.7 million against $19.7 million recorded in the corresponding period. While African countries' investment moved up by 63.3 per cent to $149.5 million the Asian countries' investment declined by 41.3 per cent to $823.1 million against $1.40 billion in the corresponding period of the last fiscal. The major investor in the country was the United States that invested $1.62 billion depicting a growth of 4.9 per cent over corresponding period's investment of $1.54 billion.

Pakistan continues to face economic, political and security challenges and foreign investors harbor a whole range of concerns about political uncertainty, security situation and continuity of economic policies. On political front, there is still a discord between the two major political parties in the ruling coalition over the issue of restoration of Supreme Court judges, deposed after President Pervez Musharraf proclaimed the state of emergency in the country last November.

Proclamation of emergency in the country on November 03 and the political turmoil following the assassination of former Prime Minister Benazir Bhutto on December 27 further decreased the portfolio investments in the country's equity markets. The outgoing fiscal year could not attract foreign investors in shares trading, as portfolio investment in the first quarter (July to September 2007) could hardly reach $57.6 million, much lower than $120.6 million in the corresponding period of last year. The heavy outflow of the portfolio investment during the July-January 2007-08 period lowered the growth of foreign direct investment (FDI), which had increased by 7.9 per cent during the same period last year. The country had received $669 million portfolio investment during July-January 2006-07, but it received only $21 million during the same period in the outgoing fiscal year.

It was actually the political instability that forced the foreign investors to withdraw their money from Pakistan equities. Otherwise the market fundamentals have been strong. The market held hostage to uncertainty on the political front and an increasingly bleak economic picture. The pre-poll political uncertainty caused an outflow of foreign portfolio investment from the equity market. After the Bhutto's killing on December 27, the cumulative outflow reached US$37.163 million on January 8, leaving only $2.594 million in the equity market. The post-poll market also shows higher volatility due to the tension between the coalition partners of the present government and the president Musharraf. In the outgoing fiscal year, the inflow of foreign investment into the country also declined due to withdrawal of money by foreign portfolio managers from stock markets of the country. Overall foreign portfolio investment declined to $103.2 million in the first six months of the outgoing year, recording a fall of 92.1 percent from $1.311 billion in the same period of last year. It fell even after the country received $90.5 million through sale of global depositary receipts of United Bank Limited.

The overall situation with reference to foreign investment in the country had improved in the last five years. According to the statistics of central bank, investments by USA and UK in Pakistan went up by 107 percent and 690 percent respectively, together touching the high level of $2.683 billion during July-May period of fiscal year 2006-07, making 42 percent of overall investment in the country against 21 percent of the same period of fiscal year 2005-06. According to central bank, USA investment during the period under review stood at $1.544 billion against $744.6 million of the fiscal year 2005-06, depicting a raise of $800 million or 107 percent. Similarly, China invested $711.1 million, United Arab Emirate $429 million, Singapore $139.5 million, Saudi Arabia $105.3 million, and Switzerland $66.6 million. In addition, Canada invested $10.8 million, Australia $59.8 million, Japan $57.4 million and Kuwait $83.9 million.

One must not forget that only positive developments on political front can invite fresh buying at the share market and improve the inflow of foreign investment in Pakistan. The judicial crisis should have an end now, as it is the root-cause of prevailing political uncertainty in the country. The coalition partners should immediately develop a consensus on the methodology of restoring the deposed judges. The economy cannot sustain more political shocks. Present government should improve its economic conditions and policy framework and ensure improved governance to attract sizable foreign investment. The improvement in infrastructure and the rule of law is direly needed. There also exists a considerable room for legislative and regulatory reforms particularly at the provincial level. Saudi Arabia, USA, UK and China can still be a major source of investments into the country. The government should also follow with reforms in many developing countries.